Strategising Heikin Ashi chart pattern
As mentioned in the previous article Understanding the Japanese bar, the Heikin Ashi chart pattern is plotted in a different way than the standard candlestick charts, this helps us, traders, to identify the emergence of a new trend or reversal patterns in an already existing trend. Similar to the candlestick patterns the Heikin Ashi has a thick ‘real body’ and the upper/lower shadows.
The values used to create the open, high, low, and close (OHCL) for the Heikin Ashi candle are not OHLC values that the underlying asset had. The Heikin Ashi candles are instead based on average prices of both the current and prior timeframe. This is what makes Heikin Ashi charts smoother. Below is an illustration of a chart of the same asset using both Heikin Ashi and standard candlesticks.
Strateging Heikin Ashi
The Heikin Ashi provides its own trade signals by alerting traders when the price is changing its direction. It does so, by changing colour and direction, from red to green or green to red. Green candles show buying pressure (bullish trend), while red candles show selling pressure (bearish trend). Adding a moving average indicator can help to filter these signals, so trades are only taken in the more dominant trend direction. As see in the illustration above, the signals are smoother on the Heikin Ashi chart patterns as they filter the data by averaging the current price movements with the previous price movements.
This is a sell-side strategy on Heikin Ashi chart patterns in 15 mins time frame.
Sell: When the Close of the current candle closes lower than the Moving Average.
( Close(0)) closes lower than ( close, 9, SMA, 0) On a 15 mins time frame.
Exit: When the Open of the current candle is the low of the current candle.
( Open(0) = Low (0))
Stoploss: 0.5 %
Target profit: 6%
Mentioned below is the backtest result of the same strategy on the Streak platform for the ITC chart that evaluates the performance of the strategy and gauges different parameters for us. We can not only evaluate the profits/Losses on previous charts but also calculate the alpha of the strategy.
Evauating the backtest result
Backtesting is the process of testing a trading strategy on relevant historical data to ensure its viability before the trader risks any actual capital. A trader can simulate the strategy and analyze the results. The backtest results although DO NOT promise any future returns.
The backtest on Streak.tech, enables traders to evaluate the maximum and minimum returns. The average period return for the stock is 1.90% whereas the returns from the moving average strategy using the Heikin Ashi chart is 13.2 % which is a good alpha for this particular chart. The winning streak is 5 and the loss is maintained at 3. The maximum exposure ( Maximum drawdown) for a strategy with 13.2% is 1.08%.
*This strategy is for educational purposes only and does not in any form guarantee future returns
